Decision making in the financial world can be challenging. You have so much information coming at you so fast, it’s difficult to process and think through all of it. But we can improve our financial thinking if we simply adhere to core principles relevant to every important area of life.
When we internalize that core truths of business, relationships and life are also applicable to investing and money management, we have an advantage. We’re less likely to be persuaded by harmful mental errors that threaten our long-term wealth. (For more, see: Financial Planning: It’s About More Than Money.)
Falling Prey to Mental Error
Clients, employees, colleagues and myself - we’re all prey to mental error. And one of the most common of these errors is the idea that a person can get something for nothing. Most people want the benefits before the work, the rewards without the risk. Given how much our society spends on lottery tickets, quick-fix diets and the like, it shouldn’t surprise us that our natural inclination is toward solutions that promise the benefit without the sacrifice.
Imagine you observe a person very skilled at what she does. She has become a master of her craft. There’s a tendency for us to believe she’s simply gifted. But we must be cognizant of what we do not see - years of experience, practice, preparation, long hours and mistakes that built the skill set. Achievement in any endeavor doesn’t just happen. Purpose, commitment, focused action, resilience and repetition of tedious tasks - these are qualities that build success. Or as Carol Dweck put it, “We like to think of our champions and idols as superheroes who were born different from us. We don’t like to think of them as relatively ordinary people who made themselves extraordinary.”
This relates to investment and financial planning because, by default, we want the easy road. For whatever reasons, we desire the final product but not the toil it requires. This is my alternate definition of insanity: desiring what does not exist. The symptoms are as follows:
- Focusing on near-term returns rather than result over entire lifespan.
- Looking at historical returns as an expectation for future returns (i.e. fixating on past results over the fundamental investment process).
- Unknowingly ignoring what we don’t know (i.e. tax consequences, long-term income potential, downside risk, etc).
The signs are similar in managing a business. I speak with at least one person a week requesting benefits without sacrifice. In other words, they want us to pay up for their talents before they’ve developed those talents (or proven they have them). They want us to fund their idea, introduce them to our clients, or pay them a salary but not be held to measurable standards. All of this because people tend to overestimate their capacity (or the time needed to build a meaningful skill set), misunderstanding that they must first prove they have developed a skill set that adds value before they can be paid for it. (For more from this author, see: Protecting Loved Ones Financially After You’re Gone.)
Something for Nothing Doesn't Exist
The point being the sooner we realize we cannot get something for nothing, the sooner we can begin to make real progress. In financial planning terms, we must realize:
1. We cannot reap the rewards without accepting some risk.
2. We cannot build true success without building a valuable skill set.
3. We can only build a skill set by putting in the time and effort required.
“Don’t tell me how talented you are. Tell me how hard you work.” – Arthur Rubenstein
This letter is not intended to be investment advice, and does not offer to provide investment advice or sell or solicit any offer to buy securities. Under no circumstance should this letter be construed as an offer to provide investment advice or sell or solicit any offer to buy securities or other investments. Weise Capital Advisors is a division of Capital Markets IQ, LLC an SEC-registered investment advisor. No financial, legal, or tax decisions should be made without thorough consultation with properly credentialed and experienced advisors. Weise Capital Advisors, LLC does not give tax or legal advice. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
CR: https://www.investopedia.com/advisor-network/articles/why-there-are-no-financial-planning-quick-fixes/
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